Protection from insurance recissions

Kim Morris |
May 17, 2009

The Milwaukee Joural Sentinel reports that state lawmakers are attempting to reduce the number of health insurance rescissions in order to protect consumers. A rescission occurs if, in the first two years of a policy, it is discovered that the applicant would not have been eligible for coverage if they had answered the application questions accurately. Common examples are 1) a person not eligible for Medicare states they are younger than 65 in order to qualify, 2) a person diagnosed with immune deficiency (AIDS) does not reveal this on the medical question, 3) a person uses a fake address to qualify for insurance not available in their state of residence. In these cases, the insurer returns all the premiums previously paid and cancels the insurance retroactive all the way to the original proposed start date of the policy.

Policy rescissions bring ill-will and bad press to the insurance industry so it is no surprise that the industry supports legislation that would eliminate this rare and unfortunate occurrence. On the surface, it seems like a "win/win" for consumers and the insurance industry. But our concern is for the affordability of insurance for the large majority of applicants who are honest in obtaining insurance coverage.

In our experience through thousands of enrollments spanning more than a decade, we know that the large majority of rescissions are triggered by the applicants intentional mis-statement on the insurance application in order to gain acceptance. Since insurance companies and state law enforcers seldom prosecute this type of insurance fraud, there is little tangible evidence to support our observation. Still, we believe that a large majority of insurance recessions are fully justified and that the applicant "got off easy" by being allowed to receive all premiums paid and walk away with no other adverse consequence of their improper action. In very rare circumstances we have seen a person with a cognitive or language handicap become an unwitting victim of a rescission. But these rare cases "prove the rule", in our opinion, that most recessions are fully justified.

The effect of Wisconsin's proposed legislation is to have the large majority of honest insurance applicants pay for the deceitful action of the few dishonest applicants. The proposed law would encourage dishonesty and increase the price of the nation's most affordable health insurance plans. We simply believe this is the wrong approach toward health care reform, yet few consumers are likely to understand the issue and protest the proposed change.